Government Bonds In India

Indian government bonds, often known as government securities or G-Secs, are issued by the Indian central or state governments. When you purchase Indian government bonds, you become a creditor who loans money to the government. Government entities in India issue G-Secs to finance their operations and construct roads, schools, and other infrastructure projects.




What Are Government Bonds?


Government bonds are debt instruments issued by the central and state governments of a country to finance their operations and regulate the money supply. When the government requires funding for infrastructure development and government spending, these bonds are frequently the solution. Thus, the government will solicit investments by selling bonds to the public. At the maturity date specified in the bond, the government will repay the principal and interest according to the bond’s terms. Under the guidance of the Reserve Bank of India, the government issues bonds (RBI).


On behalf of the government of India, the RBI issues bonds to cover the fiscal deficit. Bonds have been issued to significant market participants such as companies, commercial banks, and financial institutions throughout the previous few years. However, in recent years, smaller investors like individual investors, cooperative banks, etc. have had access to government bonds. Individual investors are also becoming increasingly interested in purchasing government bonds.


Government bonds in India are often long-term investments. The term of these bonds ranges from five to forty years. Additionally, government bonds are included in the category of government securities (G-secs). The central and state governments are both able to issue government bonds. However, state government bonds are also known as State Development Loans (SDLs).


The Government of India (GOI) issues many bond types. Additionally, these bonds respond to the varied needs of investors. The coupon rate is the interest rate offered on the government bond. The coupon might be fixed or floating and paid out every six months. Typically, the government of India issues bonds with fixed coupon rates on the market.


Types of Government Bonds in India


  • Treasury bills


It is often known as T-bills, which are government bonds with a short maturity. They are issued with a one-year maturity date. These bonds are issued by the government in three categories: 91 days, 182 days, and 364 days. Investors receive no coupon payments. The profit for investors is the difference between the face value and the discounted value.


  • Fixed Rate Bonds


These government bonds carry a fixed coupon rate throughout the duration of their maturity. In other words, the interest rate is fixed throughout the period of the investment, regardless of fluctuations in market rates.


  • Floating Rate Bonds (FRBs)


As the name implies, the interest rate on these bonds fluctuates throughout the duration of the investment. Changes to the interest rate are made at certain intervals before the bond is issued. For instance, a floating rate bond (FRB) has a predetermined 6-month interval. It implies that the interest rate would be reset every six months for the duration of the loan.


  • Sovereign Gold Bonds (SGBs)


The Central Government issues Sovereign Gold Bonds, which allow entities to invest in gold for an extended length of time without having to invest in actual gold. Interest on these bonds is exempt from taxation. The prices of these bonds are tied to the price of gold. The nominal value of SGBs is determined by computing the simple average of the closing prices of gold of 99.99% purity three days prior to the issuing of such bonds. Additionally, one SGB is equal to one gram of gold.


According to RBI regulations, different entities are subject to different SGB possession limits. Individuals and Hindu Undivided Families are limited to holding a maximum of 4 kg of Sovereign Gold Bonds every fiscal year. During the same time range, trusts and other related entities can hold up to 20 kg of SGBs. These SGBs accrue interest at a rate of 2.50% per annum and have a fixed maturity period of eight years unless otherwise specified. Additionally, there is no tax imposed on interest earnings from such SGBs.

Investors seeking liquidity from these bonds will be required to wait five years before redeeming them. However, redemption will not be effective until the date of the subsequent interest payment.


  • Inflation-Indexed Bonds


It is a one-of-a-kind financial product in which both the principal and interest generated on the bond are subject to inflation. These bonds are offered primarily for retail investors and are indexed to the Consumer Price Index (CPI) or Wholesale Price Index (WPI). These IIBs ensure that the actual returns on such assets remain constant, allowing investors to hedge their portfolios against inflation. Capital Indexed Bond is a variant of such inflation-adjusted instruments. Unlike IIBs, however, only the capital or main component of the amount is indexed to an inflation index.


  • 7.75% GOI Savings Bond


In 2018, the GOI savings bond was created to replace the 8% Savings bond. According to the designation, the interest rate on this bond is 7.75%. As per the RBI regulations, these bonds can be owned by –


  • A person or individuals who are not NRIs
  • A child accompanied by a legal guardian
  • A Hindu Undivided Family


The Income Tax Act of 1961 taxes the interest income from these bonds based on the investor’s income tax bracket. The minimum investment amount is 1000 INR or multiples thereof.


  • Zero-Coupon Bonds


Zero coupon bonds, as their name implies, have no coupon payments. These bonds generate profits due to the difference between their issue price and redemption value. These bonds are issued at a discount and redeemed at face value. In addition, these bonds are not issued via auction but rather formed from existing securities.


  • State Development Loan

The State Government issues bonds to fulfil its financial requirement. Therefore, they are referred to as State Development Loans (SDLs). Using a system of negotiated bargaining, the RBI enables the issuing of these bonds. The Government typically issues security every two weeks. In addition, the interest rate on SDLs is higher than the interest rate on Dated Government Bonds. However, the bond’s interest rate cannot be determined until the auction.


Features Of Government Bonds


The section of Government securities that generates returns is determined by the sort of investor that purchases Government securities. If the investor prefers a fixed semi-annual income, G-sec with coupon rates may be a suitable option. Typically, they are issued to refund securities that have matured, advance repay assets that have not yet matured, and generate new financial resources.


  • When issuing the majority of government securities, no premium is applied to the price; they are always issued at face value.


  • Government securities are safe investment that guarantees a guaranteed income to investors.


  • Compared to the main market, the liquidity of the secondary market is greater. As a result, retail investors profit from substantial secondary market liquidity, and you can sell promptly there.


  • Regarding government securities, no tax is deducted at the source.


  • The premium, face value, and interest rate cannot be adjusted after the security has been issued because they are established at the time of issuance.


  • The Government of India issues Treasury bills and government bonds.


  • The ability to store dematerialized government securities is offered to investors.


  • When the securities are redeemed, they are returned at face value.


  • Government securities have maturities ranging from two to thirty years.


Advantages Of Investing In Government Bonds


The central, state, and municipal governments all use government bonds to finance public projects. The central government offers 2 to 30-year Treasury bonds for sale. Although they do entail interest rate risk and do not have the same earning potential as assets with higher risk, government bonds have historically been considered low-risk investments.


  • Risk-Free: Government bond buyers are assured of rewards and financial security. The standard for risk-free security has always been set by them. Therefore, investors looking for a risk-free investment should consider purchasing government bonds. Returns on government bonds are usually comparable to those on bank deposits. The principal and fixed interest are both guaranteed. Compared to bank deposits, these bonds are available for a longer period of time.


  • Regular Income: Holders of government bonds are required to receive interest payments every six months in accordance with RBI regulations. As a result, it offers bondholders the opportunity to invest their extra cash and generate a consistent income. Bonds issued by the government can be bought and traded, much like stock assets. The liquidity of these bonds is equivalent to that of banks and other financial institutions.


  • Portfolio Diversification: An investor’s portfolio is well-diversified if it contains holdings in government bonds. As risk-free investments, government bonds help to lower the overall portfolio’s risk.


Disadvantages Of Investing In Government Bonds


The downsides of investing in government bonds are listed below.


  • Low Income

In comparison to other investment possibilities such as stocks, real estate, corporate bonds, etc., the yield or interest rate on government bonds is very low.


  • Interest Rate Risk

Government bonds are long-term investment bonds with maturities between five and forty years. Consequently, the bond’s value may decline throughout this period. When inflation increases, interest rates become less attractive. In addition, the longer the duration of the bond, the greater the market risk and interest rate risk. In addition, the investor retains an investment that pays less than its market value.


Who Should Invest In Government Bonds?


Government bonds are one of India’s most secure investments. It is suited for investors with a low-risk tolerance since they desire investment security. When investing in market-linked securities, capital appreciation is typically uncertain. Consequently, they serve as a long-term investment choice for investors who lack experience in the stock market. Moreover, investors might purchase government bonds to reduce their portfolio’s total market risk. Recently, the Indian government has made a number of steps to increase individual investors’ knowledge and interest in government securities. In addition, they have simplified the subscription procedures for regular investors. For instance, the Government of India has implemented a Non-Competitive Bidding mechanism for some government bonds. Through this service, market participants may easily submit their minimum bid online. The minimum bid can be placed through specified websites and mobile applications.


In conclusion, investors wishing to diversify their portfolios might consider purchasing government bonds (fixed income instruments). Additionally, entrepreneurs seeking to launch a business might invest their spare capital in government bonds.


What Are The Different Types Of Risks While Investing In Government Bonds?


Here are a few ways to evaluate a bond’s risk:


  • Credit Risk: It is the possibility that a nation may default on its debt. This is normally not an issue for countries such as the United States, Canada, India or the United Kingdom, but it can be for Greece and Venezuela.


  • Liquidity Risk: Can you sell your bond in an emergency (i.e., if you need cash) without suffering a loss in value? During the global financial crisis, there were fewer buyers of Greek sovereign bonds. Thus, their prices steadily dropped.


  • Inflation Risk: Your gains could be eroded by inflation, particularly if you keep a bond to maturity with a fixed interest rate that does not adjust for inflation over the life of the bond. You cannot survive on a 4% coupon if the inflation rate is 8%.


  • Interest Rate Risk: Over time, interest rates fluctuate, and when they do, so does the value of bonds. Bonds that pay a lower rate than your peer group may increase in value as rates fall (e.g., when investors are concerned about economic slowdowns), but as rates begin to rise again, the same bonds may decrease in value as investors realize they aren’t receiving enough interest relative to other market results.




  • What is a bond yield?

Bond yields represent bond returns. When an investor purchases bonds from bond markets, he or she lends money to the issuers. In exchange, bond issuers promise to pay interest at maturity. The straightforward method for calculating bond yield is to divide the coupon payment by the face value. Also referred to as the coupon rate.

Coupon rate = annual coupon payment divided by face value


  • How are government bonds taxed?

In certain instances, interest income from government bonds is taxed at the slab rate. Certain bonds issued by public sector entities such as Housing Development Corporation (HUDCO) or Rural Electrification Corporation are exempt from taxation (REC). However, yields on tax-free bonds are typically lower than yields on taxable bonds.


  • Can retail investors invest in government bonds?

Yes, individual investors may purchase government bonds. Investing in mutual funds is one of the simplest methods to do so. However, this investment is subject to an expense ratio that may reduce an investor’s return. In addition to government securities (gilt) funds, retail investors can also purchase government bonds by registering for non-competitive bids on the stock exchange. There is no third party or broker involved, so investors can place orders straight to the exchange. Only a DEMAT account is required to hold the bonds.


  • What are the risks associated with buying government bonds?

Government bonds are nearly risk-free investments. However, the value of these investment instruments fluctuates in response to changes in interest rates, also known as the duration risk, which should be considered while determining how to purchase government bonds. Bonds having longer maturities are more price-sensitive to changes in interest rates. A rise in the interest rate results in a decrease in bond value, and vice versa. However, these price fluctuations will become meaningless if investors purchase the bond and keep it until maturity. Another danger associated with purchasing government bonds is that their yield may not exceed the rate of inflation.


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